Pros, cons of investment clubs

Investment clubs are quite popular these days. In fact, even if you aren’t in a club yourself, the chances are pretty good that you know someone who is. Should you consider joining such a club?

There’s no one “right” answer for everyone, of course. But if you do join an investment club, you will find that there are both “pros” and “cons” involved. Let’s take a quick look at a few of these.

The “pros”

• Investment clubs can be fun. You can learn about investments in countless books, magazines and Web sites, but you may enjoy the learning process more by joining an investment club. After all, most of us are “social creatures” by nature, so we like being with other people. By discussing investments as part of a group, you can gain a lot of knowledge in a pleasant environment. And some clubs even invite guest speakers who are experts at a particular aspect of investing.

• Clubs provide an affordable way to invest. There’s no “standard” contribution for investment clubs. Some clubs ask for $50 a month from its members, some clubs ask for $100, and some may ask for even more. Find out what the required amount is for the club you’re considering. And ask other questions, too: Can you skip a month’s contribution and still stay in good standing? Can you contribute more or less than the designated amount?

• Membership encourages investment discipline. Many people lack discipline when investing. If, for example, they own a stock that is temporarily down, they may quickly sell it, even though the company still has good prospects. But investment clubs, by their very nature, tend to have a long-term focus. Members are interested in following investments over time, not buying and selling at a frantic pace. And the most successful investors are the ones who hold quality investments for many years.

The “cons”

• Clubs are limited in scope. Even the most active club can only look at a tiny fraction of the many investment opportunities available. To build a portfolio that can help meet all your important financial goals, you have to consider the entire spectrum of investments. Consequently, you cannot rely on your investment club exclusively for your investment solutions.

• Recommendations are not personalized. Make sure that you’re comfortable with a club’s investment philosophy and its risk tolerance. For example, one club might be willing to accept a higher level of risk in exchange for potentially greater returns. On the other hand, another club may be more conservative in nature. It’s essential that you choose a club with which you’re comfortable. But even when you find a club whose approach to investing is compatible with yours, keep in mind that group decisions can never take the place of recommendations tailored to your individual needs — and you can only get that type of guidance from a qualified, experienced financial advisor.

Your membership in an investment club can be enjoyable and educational. So, if you decide to join a club, make the most of it — but keep its benefits in perspective.